Arbitration vs. Litigation: What Is The Difference?

Arbitration vs. Litigation: What Is The Difference?

Choosing whether to pursue arbitration vs. litigation hinges on several factors that parties should carefully consider as they decide on how to resolve their dispute(s).

Once a dispute reaches the point where it is clear that the parties cannot reach an agreement and need a third party to decide the dispute, it will likely end up in front of an arbitrator or make its way through the traditional litigation system. Many experts will suggest choosing one system over the other, citing the benefits of choosing to use arbitration or litigation.

Some people feel that arbitration is better than litigation, and others feel that litigation is more direct. So is arbitration really superior to litigation? As this article will suggest, one option will not always be superior to the other, but the decision will depend on the choice of the parties after a careful evaluation of the situation.

The decision to choose one or the other is often a question that turns on a variety of factors, such as the focus of the dispute, the discretion needed, or a specialized subject matter that requires specific knowledge. Understanding the factors that go into this decision by comparing and contrasting the systems and evaluating the pros and cons of each system will help parties make the best decisions for the dispute at hand. This article will define litigation and arbitration, discuss the similarities and distinctions between the systems, and discuss the benefits and disadvantages of choosing one system over the other.

Arbitration and Litigation Defined:

Before diving into a comparison between arbitration and mediation, let us first define the terms. These definitions are bare-bones; however, other aspects of these systems will be drawn out as the two are compared and contrasted below.

Litigation:

Litigation is the process of dispute resolution through the courts or a public system. It often involves two opposing parties, although there can be more parties and opposing legal stances. These disputes often focus on the enforcement or defense of a legal right. Cases that go through litigation are decided by a judge or a jury. The outcome of litigation is called a verdict or decision.

Arbitration:

Arbitration is the process of dispute resolution in front of an arbitrator or a panel of arbitrators. The process is private, and the parties have some control over the venue and decision-makers. It can be between two parties or more. The panel can decide the dispute—distinguishing it from mediation. The outcome of an arbitration is called an award.

An Important Note on Arbitration Agreements:

Before discussing the benefits of choosing one system over the other, it is important to acknowledge the role of arbitration agreements. The parties must agree to arbitration in an agreement to arbitrate.

This agreement can either be made as part of a contract outlining the relationship between the parties or the parties can agree to arbitrate. Many modern contracts include agreements that require any dispute arising between the parties to be resolved through arbitration.

Pre-dispute arbitration agreements are typically enforced in the courts when challenged, especially in the United States. Therefore, if a contract that governs the relationship between the parties has an arbitration clause in it, the parties will likely not be able to choose litigation over arbitration. If there is no pre-dispute agreement to arbitrate, the parties will have the freedom to choose how to resolve the dispute.

Arbitration v. Litigation: Similarities and Differences:

While arbitration and litigation are often placed at odds, there are a few similarities between the two systems that may make choosing one or the other a difficult one. Yet the differences between the two systems allow savvy litigants to choose the best venue for their dispute.

The similarities and differences provide a window into the factors that will need to be considered as the parties decide whether arbitration or litigation will be the best option for their dispute.

Similarities:

  • Structure of the Hearing: The structure of the hearing can be very similar in arbitration and litigation. The parties will often give an opening and then present any evidence that they have to support their position. The decision-maker will then evaluate the evidence and issue their decision.
  • Decision-maker: Unlike mediation where the parties are responsible for coming up with a solution to the dispute, in arbitration and litigation, the judge, jury, or arbitrator can issue a decision about the dispute that the parties can or have to follow.
  • Representation: Most of the time, the parties in both litigation and arbitration are represented by lawyers who plead their case.

Differences:

  • Formality: Litigation is often more formal than arbitration. Because litigation takes place in a courtroom, certain rules of decorum and formality must be followed. In contrast, many arbitrators allow for less formality in their discussions.
  • Cost: While it is not always the case, most of the time it will be cheaper to use arbitration. Arbitration typically only charges the arbitration fee and any attorneys’ fees, while litigation includes court fees, a lot more attorneys’ fees, and sometimes exert witness fees.
  • Flexibility: While litigation always produces a binding result, although appealable, arbitration may or may not be binding, depending on what the parties agree on. The parties may agree that the arbitration award is binding, or they may agree that the decision must be affirmed by the parties for it to be binding. However, the default for arbitration is typically binding.
  • Rules Used: Another layer of flexibility is added by the rules used in the process. Litigation requires the court to follow local rules for evidence and proceedings. On the other hand, arbitration allows the parties to choose the rules, either drawing from an arbitral society or agreeing on their own.
  • Selection of the Decision-makers: While both systems have a decision-maker, the arbitration process allows the parties to choose the decision-maker(s). Litigation often involves a judge that is assigned to the case and possibly a jury made up of random people from the community.
  • Speed: Arbitration is often a fairly quick process because once the arbitration panel is agreed upon, the panel can hear the case almost immediately. Litigation is often drawn out based on the schedules of judges, especially in high litigation areas.
  • Privacy: Litigation takes place in a public courtroom. Arbitration happens in a closed room between the parties and the arbitration.
  • Role of Attorneys: In arbitration, the role of the parties’ lawyers may be limited, while attorneys may be able to participate more fully in the litigation process.
  • Appealability: Decisions made in litigation are appealable to the next court. Arbitration awards are only allowed for a very limited set of circumstances, typically when the arbitrator failed to maintain neutrality or the process was not neutral.

Advantages and Disadvantages of Arbitration:

Reading through the differences listed above, a few advantages and disadvantages may be fairly evident. Factors like cost, speed, and privacy lean strongly toward arbitration.

However, other factors, like the formality, appealability, privacy/confidentiality, and the role of attorneys will likely weigh in favor of arbitration in some cases and litigation in others. Therefore, it is important to understand other advantages and disadvantages of the processes that could impact the parties’ decisions.

Advantages:

  • The expertise of the Arbitrator: Because the parties can choose the panel in arbitration, for disputes that include specialized knowledge or particular issues, the parties can choose a panel with specialized knowledge and experience in the field. With litigation, the parties will often have to present expert witnesses because the judges or jury may not have the same knowledge.
  • Equitable Results: While it is not always the case, arbitration leaves open the possibility of an equitable result that would not be possible in litigation. The arbitrator has more room than a judge or jury because they can issue awards outside a typical assignment of liability. The arbitrator could order one party to pay but also have the other party perform a task or stop doing something.
  • International Appeal: Specifically in international disputes, it can be helpful to use arbitration to avoid hearing the case in one of the parties’ home court system, which could be more sympathetic to their own citizen’s request.
  • Enforcement: Arbitration awards are typically enforceable no matter where the parties are. Occasionally, it can be difficult to enforce a judgment from litigation. This is especially true in international disputes.

Disadvantages:

  • Appealability: As mentioned above, arbitration awards are only appealed for very specific and limited reasons. It is important to consider the strength of the case and whether any solution possible would be agreeable or understandable to you. If a party would need to appeal an adverse decision should probably use the litigation system.
  • No Interim Relief: Some cases will need a judgment while the dispute is being resolved that regulates the actions of the parties while the dispute is being decided. Because arbitration is defined by the agreement and often moves quickly, arbitrators are not able to issue interim decrees.

Advantages and Disadvantages of Litigation:

As evidenced above, there are some great advantages to choosing to use arbitration, but there are also some disadvantages. The same is true for traditional litigation. Litigation is often more expensive and time-consuming, but it often allows the parties to fully flesh out their issue and allow a third party to decide.

Advantages:

  • Evidence Rules: When a party needs to limit the evidence that the other party has, litigation can be a good way to limit what is allowed based on the evidence rules that are allowed.
  • Unilateral: A court case may be filed without the agreement of the other party, allowing one of the parties to bring the other to court regardless of their desire to be in court.
  • Precedent: Because court cases set a precedent, the decision will allow subsequent cases to be decided similarly. Arbitration would require another arbitration to decide the case, and the outcome may be very different from the first.   Establishing a precedent will give the parties a certain level of predictability.

Disadvantages:

  • Inability to Choose the Decision-maker: Parties to litigation are usually assigned a judge and/or a jury to decide the case. The parties may end up with a judge or jury that is less sympathetic to their claims.
  • Expensive and Time-Consuming: Litigation will often take much longer than arbitration to conclude, which increases attorneys’ fees and other costs associated with the court.

Conclusion:

Choosing to use arbitration or allowing a dispute to be resolved through litigation is not an easy decision. And it is not true that one option will always be better than the other.

Sometimes, the precedent and interim relief that litigation offers will be beneficial to the parties in a dispute. Other times, the lower costs and creative results of arbitration may give the parties a result that they can appreciate. When comparing the two, the answer to whether arbitration is better than litigation is the tried and true lawyer answer—it depends.